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A12 business
guardian.co.tt Monday, January 2, 2017
India's money mess
NEW DELHI --- Fifty days ago,
India yanked most of its cur-
rency from circulation with-
out warning, jolting the econ-
omy and leaving most citizens
scrambling for cash. As the
deadline for exchanging the
devalued 500- and 1,000-rupee
notes for new ones hit, many In-
dians were still stuck waiting in
long bank lines.
Empty ATMs and ever-chang-
ing rules prevented people from
withdrawing money, and many
small, cash-reliant businesses from
cinemas to neighbourhood grocery
stores suffered huge losses or went
under.
Despite those problems, Prime
Minister Narendra Modi said his
November 8 demonetization de-
cree succeeded in uncovering tax
evasion and cracking down on graft.
The Indian government is urging
patience, insisting it's playing
a long game that will eventual-
ly modernise Indian society and
benefit the poor.
So far, despite the widespread
inconvenience and costs, most of
the country's 1.25 billion citizens
appear to be taking Modi's word
for it.
Here are a few things to know
about India's massive cash over-
haul:
HARDSHIP FOR THE POOR
Modi's announcement that 500
and 1,000 rupee bills --- making
up 86 per cent of India's curren-
cy --- were no longer legal tender
has posed an enormous hardship
for millions of people who use cash
for everything from salaries to cell-
phone charges.
Almost immediately, serpentine
lines appeared at banks and ATMs
as people waited hours to depos-
it or exchange old currency notes
for new bills. Since authorities only
began printing the new bills after
the policy was announced, de-
mand vastly exceeds supply and
cash machines often run dry. Daily
commerce in essentials including
food, medicine and transportation
screeched almost to a halt.
Worst affected were the coun-
try's hundreds of millions of farm-
ers, produce vendors, small shop
owners and daily-wage labourers
who usually are paid in cash at the
end of a day's work. Many lost their
jobs as small businesses shut down,
compounding their poverty.
Pankaj Aggarwal, owner of a
clothing shop in the Old Del-
hi neighbourhood of Chandni
Chowk, says his sales crashed by
70 per cent.
"You can imagine what our busi-
ness is like now. It will be some time
before our sales normalise," he said.
Modi appears to have succeeded
in promoting the cash overhaul as
a "pro-poor" policy, tapping into
deep anger among the have-nots
toward wealthy elites.
"The first two months have been
so bad for us, we don't even have
enough money to buy food," said
daily wage labourer Neeraj Mishra,
35. "Overall, I think Modi has done
some good. People with a lot of
money are the ones who have been
troubled. I don't have enough cash
for it to bother me much."
Political scientist Sreeram
Chaulia, dean of the Jindal School
of International Affairs in New Del-
hi, describes the strategy as "classic
populism."
"Some people are outraged,
but are hesitant to come out and
say it because they don't want to
be branded as anti-national or
self-centered," he said.
A BRUISED ECONOMY
The wide impact of the demon-
etization won't be known until the
government issues its next quar-
terly GDP figures in February, but
the Reserve Bank of India already
has shaved half a per cent from this
year's GDP growth forecast, to 7.1
per cent.
Since domestic commerce drives
most economic activity, analysts
have expressed alarm over the scale
of economic and social disruption
and are warning a contraction is
likely in coming quarters.
"The countless unpredictable
consequences that will continue
to show in the coming weeks and
months mean that it is, in effect, a
huge gamble," said Jan Zalewski, an
Asia expert with the Britain-based
risk assessment firm Verisk Ma-
plecroft. "Inflicting such huge costs
for what is an uncertain outcome
is problematic."
Real estate, tourism, transporta-
tion and gold and gems have been
hit the hardest, along with informal
sectors that rely mostly on cash.
Prices are forecast to rise since
the cash crunch is pinching sup-
plies of all sorts of goods.
The country's banks, however,
are seeing banner business. The
central bank said old notes worth 13
trillion rupees (US$191 billion) had
been deposited as of December 10.
That should improve bank li-
quidity and in turn encourage more
lending to boost economic growth.
MIXED MESSAGES,
CHAOTIC RULES
The Finance Ministry and central
bank have issued at least 60 dif-
ferent directives, some of them
contradictory, about such issues
as how much money can be with-
drawn from bank accounts and
which documents are needed for
depositing old cash. The mixed
messages have compounded the
overall chaos and shaken investors'
confidence.
"There appears to be less trust
in many institutions, including
the Reserve Bank and other banks.
That is one important behavioural
change that has been ushered in,"
said Mihir Sharma, senior fellow at
the Observer Research Foundation,
a New Delhi-based think tank.
Financial experts are baffled
about how to evaluate the move.
"One of the major problems with
the demonetization move is that
success is so difficult to measure,"
Zalewski said. "In and of itself, it
can't end black money, stop terror-
ism funding and the counterfeiting
of notes."
NEW BILLS, OLD HABITS
The idea that swapping old cur-
rency notes for new ones would
wipe out tax evasion has already
been proven naive. Over the last
seven weeks, Indian income tax
authorities uncovered more than
32 billion rupees (US$477 million)
in undeclared wealth held in new
notes, foreign currency, gold and
other commodities.
The Finance Ministry found
enormous stashes of new cur-
rency bills secreted away by cor-
rupt bank managers. Axis Bank's
CEO Shikha Sharma said she was
"embarrassed and upset" after it
was found managers at the bank
had used the stolen funds to fake
accounts and launder customers'
untaxed savings for a premium.
A GLOBAL TREND?
A month after Modi scrapped the
high-denomination notes, Vene-
zuela's president announced that
the 100-bolivar notes that account
for more than three-quarters of the
country's cash would be taken out
of circulation.
Skyrocketing inflation had taken
the value of the Venezuelan notes
to 2 US cents from 10 cents in the
past year.
But while India's cash overhaul
has been relatively peaceful, Ven-
ezuela's was not.
When no new bolivar notes ap-
peared to replace the old ones, ri-
ots and looting erupted in towns
across Venezuela, whose economy
was already in shambles. Hundreds
of grocery stores were damaged or
destroyed. Ultimately, the gov-
ernment extended use of the old
100-bolivar notes until January 2.
Venezuelan President Nicolas
Maduro declared the abrupt cash
overhaul an economic triumph,
claiming people were racing to
deposit the old notes into banks.
He did not say how much was de-
posited.
In Pakistan, opposition lawmak-
ers passed a resolution last week
calling for the withdrawal of the
country's highest-denomination
note from circulation. The gov-
ernment rejected that move, saying
there was no need to discontinue
the country's 5,000-rupee note,
worth about US$48.
"The very notion of cancellation
of such convenience in transactions
is preposterous and unequivocally
denied," the Finance Ministry said
in a statement. (AP)
Indians stand in a queue to deposit discontinued notes in a bank in Samba district of Jammu and Kashmir, India.
PHOTO: CHANNI ANAND
Cash overhaul
elusive as
deadline passes
China to
ease curbs
on foreign
investment
BEIJING --- The Chinese govern-
ment said it will ease restrictions
on foreign investment in sectors
ranging from banking and internet
services to rail equipment and mo-
torcycles, in response to mounting
complaints from foreign business
groups and governments.
An official with China's National De-
velopment and Reform Commission, the
economic planning agency, said service
sectors such as accounting and auditing,
architectural design and ratings services
will be open to foreign investment.
In manufacturing, barriers to foreign
investment will be lowered in sectors
such as rail transportation, motorcy-
cles and ethanol fuels, according to an
official transcript of a briefing by Ning
Jizhe, vice-chairman of the commission.
The moves are part of a set of guide-
lines approved by China's Cabinet this
week Beijing says are aimed at leveling
the playing field for foreign companies
and boosting investment, which has
been slowing. No specific details were
immediately released.
Ning said the guidelines would "help
ensure and promote fair competition be-
tween domestic and foreign companies"
and attract more investment. He said
foreign investment in China rose 3.9
per cent from January to November,
slower than the rate of growth in the
previous year.
China would also work to open up
areas typically deemed sensitive by
the government, such as internet ser-
vices, telecoms and education, in "an
orderly way," Ning said. But the extent
to which such sectors would be liberal-
ized was unclear. Earlier this year, China
passed a law on cybersecurity seen as
enabling the ruling Communist Party
to exert greater control over the internet
and technology products and moved to
more tightly control schools.
Premier Li Keqiang, who chaired
the State Council's executive meeting
that passed the guidelines Wednesday,
said China should take measures with
"great effectiveness in attracting foreign
capital," according to the official Xinhua
News Agency.
Washington and Europe complain
Beijing blocks access to its markets in
violation of its free-trade commitments.
Foreign companies complain Chinese
regulators are trying to squeeze them
out of technology and other promising
industries. In an interview with a Hong
Kong newspaper published last week,
the German ambassador to China said
that Beijing was not living up to pledges
to open its markets and give unfettered
access to foreign investment.
"We sense a growing tendency in Chi-
na towards market closure and favoring
of indigenous production," Ambassador
Michael Clauss told the South China
Morning Post. (AP)